Derivative securitized index participation notes

ABSTRACT

Techniques are described for securitizing, administrating and trading various index shares securitized by derivative, cash-settled instruments on the underlying index.

This application claims priority from and incorporates herein U.S.Provisional Application No. 60/794,481, filed Apr. 24, 2006, and titled“TRADEABLE INDEX CERTIFICATES”.

BACKGROUND

Index funds allow an investor to invest in a single investmentinstrument that tracks the performance of a portfolio of investments. Ingeneral, an index fund issues shares that represent a fractionalinterest in a portfolio of investments, which are weighted similarly tothose portfolio of investments as weighted for a published securitiesindex, e.g., stock index, in order to mirror, track, or generallycorrespond to the price and/or yield performance of the stock index.

One example of an index fund is a Standard & Poor's Depository Receipt(“SPDR”). An SPDR is a type of security known as a portfolio depositoryreceipt (also known as an Exchange Traded Fund), which represents anundivided ownership interest in a portfolio of stocks held by the SPDRTrust. The SPDR Trust holds a portfolio of stocks that is intended tomirror, track, or generally correspond to the price and/or yieldperformance of the S&P 500 Index.

Securities, like SPDRs, may trade on a stock exchange, a securitiesmarket or an electronic communication network. The price of suchsecurities during intra-day trading is determined by supply and demand.In particular, depository receipts issued by the SPDR Trust may begenerated or redeemed on any business day at the next calculated netasset value (NAV), but only in “creation units” of 50,000 SPDR shares.SPDR creation units are generated or redeemed through an in-kindtransfer of the basket of stocks that correspond to the stocks listed inthe S&P 500 Index. Although the NAV of the SPDR Trust is only publishedat the close of every business day, the value of the corresponding S&P500 index is published continuously throughout each trading day anddistributed electronically to brokers and dealers throughout the world.Similarly, a number corresponding to the intra-day value of each SPDRshare, based on the most recently traded prices of the stocks of the S&P500 index in the current day's SPDR creation unit, is ordinarilypublished at 15 second intervals throughout the trading day.

Index futures contracts and index options provide other techniques forinvestors to invest, trade, or hedge based on the performance of anindex. An index futures contract is a futures contract on a financialindex such as the S&P 500 index, whereas index options are instrumentsthat give the holder the right to receive cash settlements based onchanges in the underlying index on which the option is based. A callindex option would ordinarily give a payout if the index rises above itsstrike price, whereas a put index option would give a payout if theindex falls, below its strike price.

SUMMARY

According to an aspect of the present invention, a computer implementedmethod includes determining a value for a tradable index share thatinversely tracks performance of an index. The tradable index share isbacked by a fractional interest in a derivative financial instrument andan amount of cash that secure the tradable index receipt.

Embodiments can include one or more of the following.

The financial instrument can be a short index futures contract. Themethod can also include producing in the computer system arepresentation of a creation unit that includes fields that identify theshort index futures contract and the amount of cash. Producing therepresentation of the creation unit can include accessing an initialmark price of the short index futures contract and a contract multiplierof the futures contract and recording a defined amount of cash relatedto the initial mark price to add to the creation unit. The method canalso include calculating the defined amount of cash on a date subsequentto generation of the tradable index shares by multiplying the marketprice of the index futures contract on a particular date by the contractmultiplier.

The financial instrument can be a long put index option and a short callindex option. The long put index options contract and the short callindex options contracts can have the same initial strike price and thesame expiration date. The method can also include producing in thecomputer system a representation of a creation unit that includes fieldsthat identify the long put index options contract, the short call indexoptions contract, and the amount of cash. Producing the representationof the creation unit can include recording an initial mark price of thelong put index and short call index options contracts and a contractmultiplier of the futures contract and recording a defined amount ofcash to add to the creation unit. The method can also includecalculating the defined amount of cash on a date subsequent togeneration of the tradable index shares by determining if the indexvalue on the expiration date is greater than the strike price of thelong call and short put options contracts. If the index value on theexpiration date is greater than the strike price of the long call andshort put options contracts, the method can include exercising the longcall index options contract. If the index value on the expiration dateis less than the strike price of the long call and short put optionscontracts, the method can include exercising the short put index optionscontract.

Calculating the defined amount of cash can also include adding accruedinterest. The index can be a securities index.

According to an aspect of the present invention, a computer implementedmethod can include determining in a computer, a value for a tradableindex share that provides a positive return if performance of an indexis within a predefined range of performance of the index. The tradableindex share is backed by a fractional interest in a derivative financialinstrument, a short call options contract, and an amount of cash thatsecure the tradable index receipt.

Embodiments can include one or more of the following.

The derivative financial instrument can be a long index futurescontract. The method can also include calculating the defined amount ofcash on a date subsequent to generation of the tradable index shares bymultiplying a current mark price for the long index futures contract onthe date of receipt of the redemption request by the contractmultiplier. Determining the amount of cash further can include addingaccrued interest.

The amount of cash can be equal to the mark price of the long indexfutures contract. The method can also include producing in the computersystem a representation of a creation unit that includes fields thatidentify the long index futures contract and the amount of cash.

The financial instrument can include a long call index options contractand a short put index options contract. The long call index optionscontract and the short put index options contract can have the sameinitial strike price and the same expiration date. The amount of cashcan be an amount of cash equal to the initial strike price. The methodcan also include producing in the computer system a representation of acreation unit that includes fields that identify the long call indexoptions contract, the short put index options contract, the short callindex options contract, and the amount of cash. The method can alsoinclude calculating the defined amount of cash on a date subsequent togeneration of the tradable index shares by multiplying the initialstrike price of one of the long call and short put index optionscontracts by the contract multiplier. Determining the amount of cashalso include adding accrued interest. The index can be a securitiesindex.

One or more aspects of the invention may include one or more of thefollowing advantages.

The issuer holds derivative instruments and cash in a custody accountand issues the tradable index shares. representing a fractional interestin the value of the custody account. By securitizing tradable indexshares with a derivative, several advantages are provided such asreducing transaction costs involved with purchasing and trading of thetradable index shares.

In addition to reducing the transaction costs for the investors, thetransaction costs can also be reduced for the issuer. Rather thanpurchasing each of the underlying products, e.g., securities that makeup the index, the issuer needs only to purchase the derivate for theindex. This reduces the number of transactions necessary to generate acreation unit. In addition custodial costs of keeping and tracing theshares are reduced for the custodian by merely having custody of thederivate. Such tradable index products based on such a creation unit are“bear” type products because their performance will have an inverserelationship to the performance of the index.

The details of one or more embodiments of the invention are set forth inthe accompanying drawings and the description below. Other features,objects, and advantages of the invention will be apparent from thedescription and drawings, and from the claims.

DESCRIPTION OF DRAWINGS

FIG. 1A is a block diagram of a computer system.

FIG. 1B is a flow chart depicting issuance of Index Participation Notes.

FIG. 1C is a block diagram depicting a data structure representation ofan Index Participation Note.

FIG. 2 is a block diagram of a creation unit and multiple IndexParticipation Notes.

FIG. 3 is a block diagram depicting relationships among entities.

FIG. 4 is a chart of the value of an Index Participation Note relativeto other investment vehicles.

FIG. 5 is a flow chart of a cash adjustment process for a creation unit.

FIG. 6 is a chart of changes in a mark price and related changes in thecash value of a creation unit.

FIG. 7 is a flow chart of a process for adjusting the cash amountincluded in a creation unit.

FIG. 8 is a flow chart of a settlement process.

FIG. 9 is a flow chart of a settlement process.

FIG. 10 is a flow chart of a redemption process for a creation unit ofIndex Participation Notes.

FIG. 11 is a block diagram depicting a creation unit.

FIG. 12 is a block diagram of a creation unit and multiple IndexParticipation Notes.

FIG. 13 is a block diagram of a creation unit and multiple IndexParticipation Notes.

FIG. 14 is a block diagram of a creation unit and multiple IndexParticipation Notes.

FIG. 15 is a block diagram depicting relationships among entities.

FIG. 16 is a flow chart of a settlement process.

FIG. 17A is a diagram of changes in the value of an index versus time.

FIG. 17B is a diagram of changes in the value of an index versus time.

FIG. 18A is a diagram of changes in the value of an index versus time.

FIG. 18B is a diagram of changes in the value of an index versus time.

FIG. 19 is a flow chart of an options strike price matching process.

FIG. 20 is a block diagram of long call and short put index optionsstrike prices.

FIG. 21 is a flow chart of an options strike price matching process.

FIG. 22 is a block diagram of a long call and short put index optionsstrike prices.

FIG. 23 is a block diagram depicting a creation unit.

FIG. 24 is a block diagram of a creation unit and multiple IndexParticipation Notes.

FIG. 25 is a block diagram of a creation unit and multiple IndexParticipation Notes.

FIG. 26 is a block diagram of a creation unit and multiple IndexParticipation Notes.

FIG. 27A is a diagram of changes in the value of an index versus time.

FIG. 27B is a diagram of changes in the value of an index versus time.

FIG. 28 is a block diagram of a creation unit and multiple IndexParticipation Notes.

FIG. 29A is a diagram of changes in the value of an index versus time.

FIG. 29B is a diagram of changes in the value of an index versus time.

FIG. 30 is a block diagram of a creation unit and multiple IndexParticipation Notes.

FIG. 31 is a block diagram of a computer system.

DESCRIPTION

Referring to FIG. 1A, a computer system 10 includes software to assistwith creation and issuance 12 a, administration 12 b, redemption 12 cand trading 12 d of Index Participation Notes. Although a singlecomputer system 10 is shown, typically many such systems can be used andindeed each of the software processes can be performed on differentcomputers, controlled by or managed by different entities that areinvolved in any of the aspects of the Index Participation Notes.

Referring to FIG. 1B, an Index Participation Note issuer receives (14 a)a derivative instrument and cash from an Index Participation Noterequestor and produces (14 b) a creation unit based on the receivedderivative instrument and cash. The Index Participation Note issuerissues (14 c) Index Participation Notes that are held by the IndexParticipation Note requestor or traded by investors (14 d) overexchanges, securities markets, electronic communication networks (ECN'S)and other trading venues.

The creation unit holds a derivative interest plus cash to secure theIndex Participation Notes. The creation unit is provided to track anaspect of performance of a particular index or indexes of securities,several examples of which will be described below. Non-limiting examplesof indexes include The Nasdaq-100® or The Standard & Poor's 500 Index®,as well as any other index of underlying constituent instruments thathave correspondingly traded derivative instruments regardless of assetclass (e.g., equity, fixed income, currency, commodities, etc.).

The creation unit is held by the Index Participation Note issuer andincludes combination of cash and derivative positions that backs theIndex Participation Notes. The Index Participation Notes representfractional interests in the creation unit.

Referring to FIG. 1C, the computer system can include a computerreadable medium 16 that stores a representation of the IndexParticipation Notes such as in a data structure, e.g., 18 used withsoftware that assists with creation and issuance, administration,redemption and trading of the Index Participation Notes. Otherrepresentations are possible including unstructured representation, arecord and so forth.

An exemplary data structure 18 used to represent the Index ParticipationNotes can include a field that identifies the index 18 a, one or morefields that identify the derivative instrument securing the IndexParticipation Notes 18 b, a field indicating the settlement date of thederivative instrument 18 c, and a field storing the value of cashincluded in the creation unit 18 d. As described below, the fieldstoring the value of the cash 18 d is updated as the value of the IndexParticipation Notes changes.

As will be described below, various types of Index Participation Notesare possible. Therefore, fields can be included in the representation ofthe Index Participation Notes for identifying the types of notes andwhether the notes roll over or are cashed out at maturity and so forth.

In one embodiment, the Index Participation Notes 22 are based on aderivative that is an index futures contract on the index which theIndex Participation Note tracks. The Index Participation Note issuer maycharge a fee which could be included at issuance, redemption, or duringthe interim between issuance and redemption of the Index ParticipationNotes 22. If a fee is charged at issuance, the Index Participation Noteissuer adds the fee to the price of the Index Participation Notes. Onthe other hand, if a fee is charged at redemption, the IndexParticipation Note issuer subtracts the fee from the determined totalvalue of the investor's Index Participation Notes on the redemptionnote.

Creation of Index Participation Notes with Futures Positions

Referring to FIG. 2, one embodiment of the Index Participation Notes 22represents a fractional interest in a creation unit 20 that includesboth an index futures contract 24 and a defined amount of cash 26. Eachcreation unit 20 is divided into a predefined number of IndexParticipation Notes 22. For example, creation unit 20 can be partitionedinto ‘N’ Index Participation Notes 22, such that each IndexParticipation Notes 22 represents a 1/N^(th) ownership interest in theindex futures contract 24 and 1/N^(th) ownership interest in the cash 26included in the creation unit 20.

For example, in some embodiments, the value of the Index ParticipationNote 22 can be selected to be 1/10 of the value of the index. Becausethe index futures contracts often have a multiplier associated with them(e.g., the contract multiplier for the S&P 500® index futures contractis 250), in order to have the value of the Index Participation Note beapproximately equal to one-tenth of the value of the index, the creationunit can be divided into a number of Index Participation Notes equal toten times the contract multiplier (e.g., 2500 for the S&P 500® exampleabove). Other partitions of the creation unit 20 into 10 other amountsof Index Participation Notes 22 are possible. The number of IndexParticipation Notes corresponding to a single creation unit can bedependent on the value of the creation unit 20. For example, the numberof Index Participation Notes can be such that the total value of thecash in the creation unit 20 divided by the number of IndexParticipation Notes is between $10 and $10,000.

The index futures contract 24 included in the creation unit 20 is a longindex futures contract position. An index futures contract position is afutures contract based on an index. One exemplary type of index is afinancial index such as the NASDAQ-100® or S&P 500®. Another exemplarytype of index is a commodities index. Index futures contracts arecontractual agreements to make or receive cash payments that areeconomically equivalent to buying or selling a particular index-basedfinancial instrument at a pre-determined price in the future. In thecase of an index futures contract 18, the predetermined price is theprice of the index at a particular date specified by the index futurescontract 24 (referred to as the settlement date).

The amount of cash 26 included in the creation unit 20 varies over timeas the value (e.g., the mark price) of the index futures contract 24changes. The computer executing the creation process (or anotherprocessing device) computes the initial amount of cash 26 to be placedin the creation unit, tracks changes in the value of the cash 20, andprovides up-to-date summaries of the value of the cash 26 included inthe creation unit 20. An index futures contracts are cash settledcontracts (as opposed to commodity futures contracts which can besettled by delivery/acceptance of delivery of the underlying security orcommodity), the index futures contract 24 settles by a cash amount whichis economically equivalent to the value of the index on the maturitydate of the contract times the contract multiplier that scales the sizeof the contract relative to the value of the index. Thus the computercalculates the value of the cash 26 on any particular date prior tosettlement by multiplying the last futures-mark-price for index futurescontract 24 by its contract multiplier established on the day ofcreation of the Index Participation Notes 22. If the cash 26 is held inan interest bearing account, the computer also tracks the changes in thetotal value of the cash 26 in the creation unit 20 on any day aftercreation to reflect principal value (as described above) plus accruedinterest.

Referring to FIG. 3, in order to facilitate creation of IndexParticipation Notes 22, futures positions are established between acontra-party 31 and the Index Participate Note-requestor using aclearing house 30. The Index Participation Note requestor establishes along index futures contract position 24 while the contra-party 31establishes a short index futures contract position 32. Since the longan short positions are used to determine future credits/debits, no money(other than applicable fees) is exchanges between the clearing house 30and the Index Participation Note requestor during formation of the longand short index futures contract positions 24 and 32. Both the long andshort index futures contract positions 24 and 32 are established basedon a “mark price” for the index future on the day the contracts 24 and32 are formed. Money is subsequently exchanged between the contra-party31 and the Index Participation Note requestor based on differencesbetween the mark price established on the day of issuance of the indexfutures contract and the current mark price for the index futurescontract as indicated by arrows 36 and described below in relation toFIGS. 5 and 6). Any changes to the mark price (and therefore to thevalue of the cash 26 in creation unit 20) are tracked by the computersystem such that an accurate value for the cash 26 can be known andreported.

After the futures positions 24 and 32 have been established between thecontra-party 31 and the Index Participation Note requestor, the IndexParticipation Note requestor requests to generate a creation unit ofIndex Participation Notes with the Index Participation Note issue whoproduces a creation unit 20. As described above, the creation unit 20holds the index futures contract 24 and a predefined amount of cash 20.The amount of cash 26 included in the creation unit 20 varies based onthe market conditions at the time of formation of the creation unit 20.In general, the amount of cash 26 in the creation unit equals the lastfutures “mark price” for the index future 24 multiplied by the contractmultiplier for the futures contract. An example of the contents of anexemplary creation unit 20 is provided below.

In the following example, the Index Participation Notes 22 represent afractional interest in a creation unit 20 based on the S&P 500 Index®.At the time of establishment of the creation unit, the S&P 500 Index®has the following market conditions:Last S&P 500 Futures-Mark-Price=1200S&P 500 Index Futures Multiplier=250

Based on these market conditions, a creation unit 20 would include anS&P 500 index futures contract long position and cash in an amount equalto the S&P 500 index future contract's last “futures-mark-price” timesthe index's contract multiplier as they exist on the day of formation ofthe creation unit 20. In this example, the mark price is $1200 and thecontract multiplier for the S&P 500 index future is 250. Thus, thecreation unit 20 could be represented as follows:One Creation Unit=1 Open Long Index Futures ContractPosition+(Contract's Last Futures-Mark-Price)*(S&P 500 ContractMultiplier)

Thus, based on the exemplary market conditions described above, thecreation unit would include:One Creation Unit=1 Open Long Index Futures ContractPosition+($1200)*(250)=1 Open Long Index Futures ContractPosition+$300,000

Index Participation Notes 22 represent a proportional ownership stake inthe creation unit 20. Initially, the Index Participation Notes 22 arequoted to investors at a price that is based on the pro-rate cash amountand the net value of the index futures contract 24 versus its last markprice at the time of quotation of the Index Participation Notes 22 afteraccounting for expenses and fees.

Thus, the market price of the Index Participation Note 22 is initiallyrelated to the futures mark to market price of the index on the day offormation. For example, based on the exemplary market conditions for theS&P 500 Index Participation Notes described above if each IndexParticipation Note 22 had a value of 1/10 of the futures price, theprice of the Index Participation Note would be $120 (e.g., the lastfuture mark price of $1200 divided by 10). Thus, there would be 2500Index Participation Notes 22 generated based on the creation unit 20.

After purchasing of the Index Participation Note 22 from the IndexParticipation Note issuer, the Index Participation Note 22 can be tradedusing an exchange, a securities market, an electronic communicationnetwork (ECN) and other trading venues. In order to facilitate opentrading of the Index Participation Notes 22, the Index ParticipationNotes 22 can be listed and traded like ordinary shares of stock orexchange traded funds (ETFs) on one or more securities exchanges,markets and/or through the matching facilities of one or more electroniccommunication networks (ECNS). Secondary market trading of IndexParticipation Notes 22 will be at prices governed by competitive supplyand demand forces taking into consideration, among other factors, thevalues of the index futures contract 18, cash 26 and value of the indexthat the Index Participation Notes 22 represent. Since the IndexParticipation Notes 22 would be registered and traded in a mannersimilar to traditional stocks on a national securities exchange, theIndex Participation Notes 22 will be available to be traded and heldthrough any ordinary stock brokerage account and handled by any one ofthe Registered Representatives in the United States today.

As described above, the Index Participation Note issuer holds thefutures contract 24 and cash in a custody account and issues IndexParticipation Notes 22 representing a fractional interest in the valueof the custody account. Since the futures contract 24 is held by theIndex Participation Note issuer in a custody account (as opposed tobeing held by the investors), the ownership of the futures contract 24does not change as the Index Participation Notes 22 are traded. Thisprovides various advantages such as, for example, reducing transactioncosts involved with purchasing and trading the Index Participation Notes22. In addition, since there is no trading of the index futures contract24 at the Index Participation Note investor level (e.g., by IndexParticipation Note investors), the Index Participation Notes 22 can betraded on a securities exchange.

In addition to reducing the transaction costs for the investors, thetransaction costs can also be reduced for the Index Participation Noteissuer and thus to IP note holders. For example, rather than purchasingeach of the underlying securities that make up the index, the IndexParticipation Note issuer needs only to purchase the index futurescontract 24 for the index. By reducing the number of transactionsnecessary to generate a creation unit 20 (e.g., a single transaction topurchase the index futures contract 24 versus multiple transactions topurchase each of the securities in the index), the transaction costs forthe Index Participation Note issuer are reduced.

Referring to FIG. 4, in an illustrative non-limiting example, the valueof an index fund (represented by line 70) closely tracks the value ofthe stocks included in the index fund (represented by line 72) becausethe index fund is comprised of a basket of stocks which track, resembleor replicate the stocks underlying the index. It is believed that theintra-day and day-to-day market value of Index Participation Notes 22will in general closely track the pro-rate value per note outstanding ofthe Index Participation Note custody account which holds the indexfutures contract 24 and cash 26 held by the Index Participation Noteissuer.

Put another way, the value of the Index Participation Notes 22(represented by line 76) is expected to track the price of the indexfutures contracts (represented by line 74). The tracking between thevalue of the Index Participation Notes 22 and the value of the indexfutures contract 24 is based on the inclusion of both the index futurescontract 24 and the cash 26 in each creation unit 20 for the IndexParticipation Notes 22. Since the cash 26 included in the creation units20 varies based on the performance of the index futures contract 18, thevalue of the creation unit 20 (and therefore the value of the IndexParticipation Note 22) will vary based on the performance of the indexfutures contract 18.

On the issue date of the Index Participation Notes 22 (indicated byarrow 84), the value of the index and the value of the IndexParticipation Notes 22 will, in general, be different. The value of theindex will be equal to the value of the underlying stocks included inthe index (indicated by spot value 80), whereas the value of the indexfutures contract may diverge.

As stated above the value of the Index Participation Notes 22 will trackthe value of the index futures contract 18. However, because thetheoretical value of an index futures contract 24 includes twocomponents, namely “spot value” plus “carry value,” initially, the indexfutures contract 18, and therefore the Index Participation Notes 22,will closely track movements of the index but will diverge in absolutevalue to the extent of the carry value. The spot value of the indexfutures contract is the cash price required to acquire the underlyingstocks and the carry value of the index futures contract is the expectedcost to hold an ownership interest in the underlying stocks until thesettlement date 86. The spot value for the index futures contract willclosely track the value of the index while the carry value will varybased on interest rates reflecting the purchase price of the underlyingindex stocks and the dividend yield on the index stocks held throughsettlement date. As the settlement date nears, the carry value for theindex futures contract 24 approaches zero such that the value of theIndex Participation Note 22 converges to the value of the underlyingindex as the index futures contract which itself converges to theunderlying index.

With this arrangement the Index Participation Note 22 backed by the longindex futures contract and the long cash position is economicallyequivalent to being long the basket of stocks included in the index.More particularly, since the Index Participation Notes 22 correspond invalue to long positions in both cash 26 and the index futures contract18, held in the Index Participation Note issuer's custody account, thevalue of the Index Participation Notes 22 on the settlement date 86 willconverge to the value of the underlying index. Accordingly, as shown inFIG. 4, the value of the Index Participation Notes 22 (represented byline 76) and the value of the index (represented by line 70) converge tothe same price 78 on the settlement date 86. Thus, the position claimedby the Index Participation Notes 22 (i.e., long cash and long an indexfutures contract) has the same economic value as owning the underlyingstocks on the settlement date 86.

Referring to FIG. 5, a process 100 for adjusting the amount of cash 26in the creation unit 20 based on the performance of the index futurescontract 24 is shown. As described above, the intrinsic day-to-day valueof the Index Participation Note 22 will vary based on the priceperformance of the index futures contract 24.

The creation unit 20 is initially established to include the indexfutures contract 24 and an amount of cash 26. A computer system storesthe contents of the creation unit 20, e.g., the index futures contract24 and the amount of cash 26 and records the fractional interestrepresented by each of the Index Participation Notes 22. On the date offormation of the index futures contract 24 a strike price (also referredto as the initial mark price) is established (102). Since the mark priceis used subsequently to determine adjustments in the cash 26, thecomputer stores the mark price.

The initial mark price for the index futures contract is subsequentlyupdated at predetermined time intervals (e.g., the close of each dailytrading session). After the mark price has been updated, the computerstores the new mark price and compares the new mark price to theprevious mark price (104) to determine if there has been a change. Ifthere is a difference between the current and previous mark prices, theaccounts of the long position holder and short position holder of thefutures contracts are adjusted based on the difference (106).

Since the Index Participation Note issuer holds a long index futurescontract 24, if the mark price increases, the difference between the twomark prices (e.g., a positive value) will be credited to the IndexParticipation Note issuer's account at the clearing house 30 and thedifference between the two mark prices will be debited from the accountof the contra-party 31 that holds the short index futures contractposition. In contrast, if the mark price decreases, the differencebetween the two mark prices will be debited from the Index ParticipationNote issuer's account and the difference between the two mark priceswill be credited to the account of the contra-party 31.

The intrinsic value of the Index Participation Note 22 will increasewhen the mark price for the index futures contract 24 rises and willdecrease when the mark price for the index futures contract 24 falls.All changes in the value of the creation unit 20 (e.g., changes in thevalue of the cash 20) are tracked by the computer system.

After the accounts of the Index Participation Note issuer and thecontra-party 31 have bee adjusted or if no adjustment is needed, thecomputer system determines if the current date is equal to thesettlement date for the index futures contract 24 (110). If the date isnot the settlement date, the determination of change in mark price andadjustment of the accounts is repeated. If the date is the settlementdate, the positions of the Index Participation Note holders are settledbased on the change in value of the Index Participation Note 22 (112).

Referring to FIG. 6, exemplary adjustments to the contents of a creationunit 20 (represented in column 126) based on the changes in the markprice (shown in columns 122 and 124) for the underlying index futurescontract 24 are shown. On the date of issue of the index futurescontract 18, an initial mark price is established. As shown in row 128,on the date of issue (T), the mark price 122 for the index futurescontract is $100. In this example, the index multiplier for the indexfuture is assumed to be one-hundred for ease of explanation. As such,the contents of the creation unit 20 upon establishment include theindex futures contract 24 and the defined cash 26 amount that equals theindex futures contracts' strike price multiplied by the contractmultiplier. As shown in row 130, on the day following the date of issue(T+1), the mark price 122 for the index futures contract has increasedto $101. Thus, the change in the mark price 124 is +1 and the amount ofcash in the creation unit 20 increases by $100 to $10,100. As shown inrow 132, on the following day (T+2), the mark price for the indexfutures contract has decreased to $98. Thus, the change in the markprice 124 is −3 and the amount of cash in the creation unit 20 decreasesby $300 to $9,800. Such adjustments continue until the date ofsettlement of the index futures contract 18.

Referring now to FIG. 7, the contents of the creation unit, and thus thevalue of each Index Participation Note, are adjusted based on accruedinterest on the cash 26 held in the creation unit 20. For example, thecash 26 included in the creation unit 20 could be held in treasurer'snotes or an interest bearing account or other type of interest bearinginstrument including the clearing member's interest bearing account atthe clearing house. The interest earned is credited to the value of thecreation unit 20. If the cash 26 is held in an interest bearing account,the value of the cash 26 increases over time. In order to accuratelyassess the value of the Index Participation Notes 22, a computermaintains an accurate representation of the value of the index futurescontract 24 and the value of the cash 26 (including both adjustmentsbased on the performance of the futures contract and based on theaccrued interest).

A computer implemented process 140 for reporting the current value of acreation unit 20 includes using a computer system to determineadjustments to the cash 26 based on the accrued interest since theprevious reporting period, for example, the accrued interest since theprevious day (142). The computer system also determines adjustments tothe cash 26 based on differences between the current mark price and theprevious mark price (144). After determining both the adjustment to thecash 26 based on the performance and the interest, the computer systemprovides the necessary information for the Index Participation Noteissuer to publish the contents of the creation unit 20 to reflect thecurrent value of the cash 26 included in the creation unit 20 (144).

The value of the creation unit 20 on any given day is primarily thevalue of the cash 26 included in the creation unit. The relativeproportion of value of the index futures contract 24 to the cash 26included in the creation unit 20 is low. The majority of the value ofthe creation unit 20 is cash 26 because the index futures contract 24simply adjusts the total amount of cash 26 by incremental amounts on aday-to-day basis. Thus, the value of the index futures contract 24 inthe creation unit 20 is effectively converted to a cash amount (e.g.,the adjustment based on the mark price) each day. Since the value of thecreation unit 20 and, thus, the Index Participation Notes 22, isprimarily based on the cash 26 included in the creation unit 20, and afinancial claim on cash is a security and not a commodity, the IndexParticipation Notes 22 are securities that can be traded on a securitiesmarket.

Redemption/Settlement of Index Participation Notes

As described above, the Index Participation Notes 22 are based on acreation unit 20 that includes an index futures contract 24 and adefined amount of cash 20. The index futures contract 24 has asettlement date that is set and known at the date of issuance of theindex futures contract 18. Since the Index Participation Notes 22 arebased on the index futures contract 18, in some embodiments, the IndexParticipation Notes 22 also have a fixed term.

Referring to FIG. 8, in one embodiment, the Index Participation Notes 22have a fixed term, e.g., a settlement/liquidation date that coincideswith a settlement/liquidation date underlying the futures contract 18. Aprocess 150 for settlement of fixed term Index Participation Notes 22includes determining, typically by the Index Participation Note issuer,the final value for the Index Participation Notes 22 on or after thesettlement of the index futures contract 24 (152).

A computer system calculates the final value of the Index ParticipationNotes 22 based on the mark price for the futures contract 24 on thesettlement date and any interest accrued on the cash 26 in the creationunit 20. As such, the final value calculated by the computer systemreflects any changes in the mark prices between issuance and redemptionof the futures contract 18 c and reflects the interest gained on thecash 20.

The Index Participation Note issuer determines the number of IndexParticipation Notes 22 held by a particular investor on the settlementdate (154). The Index Participation Note issuer uses the computer systemto determine the value of the Index Participation Notes 22 bymultiplying the number of Index Participation Notes 22 held by theinvestor by the determined value for the Index Participation Notes 22(156).

The Index Participation Note issuer may charge a fee for redemption ofthe Index Participation Notes 22. If a fee is charged for redemption,the computer system subtracts the fee from the determined total value ofthe investor's Index Participation Notes (158). The Index ParticipationNote issuer transfers the value of the investor's Index ParticipationNotes less any fees to the investor (160).

Referring to FIG. 9, another embodiment, of the Index Participation Note22 is one in which the term of the Index Participation Note 22 isvariable. For a variable term Index Participation Note 22, the holdersof the Index Participation Notes 22 may exercise a periodic, e.g.,quarterly cash-out feature. Any remaining, non-exercised IndexParticipation Notes 22 would be subject to automatic roll-forward ofexpiring futures contracts. With this roll-forwarding the IndexParticipation Note-issuer generates a new creation unit of future-datedfutures contracts. The Index Participation Note issuer rolls-forward theinterest of the non-exercising Index Participation Note holders byissuing new Index Participation Notes to them based on the new creationunit. The Index Participation Note issuer uses a computer system totrack the contents of the creation unit 20 before and after the IndexParticipation Notes 22 are rolled-forward.

Referring now to FIG. 9, a process 190 for settlement of variable termIndex Participation Notes 22 is shown. On the settlement date for theindex futures contract 18, the Index Participation Note issuer uses acomputer to determine the value of each Index Participation Note 22(196). The Index Participation Note issuer determines, based on rules, anew, one or more future-dated index futures contracts to include in anew creation unit based on the index (190) and goes into the market tosecure those contacts following non-discretionally execution.

For example, the initial index futures contracts included in thecreation unit 20 could be 2006 S&P 500® index futures contracts with asettlement date of December 2006. On the settlement date, the 2006futures contract is settled and a new index futures contract with asettlement date 1 year later (e.g., a 2007 S&P 500® index futurescontract) is purchased.

After the futures contract for the new creation unit is determined, theIndex Participation Note issuer uses a computer to calculate the initialprice for the Index Participation Notes based on the creation unit 20that includes the new index futures contract (200). This price could begreater than, equal to, or less than the value of the IndexParticipation Notes on the settlement date.

For Index Participation Notes 22 having a variable term, the holder ofthe Index Participation Note can decide whether to hold the IndexParticipation Note (and thus receive interest in the new creation unit)or to liquidate the Index Participation Note for cash. The IndexParticipation Note issuer determines if the note holder has exercisedthe cash-out option for the Index Participation Note 22 (202).

If the Index Participation Note holder has exercised the cash out optionor the Index Participation Notes 22 are fixes term, the IndexParticipation Note issuer uses a computer to calculate the payment dueto the holder of the Index Participation Notes 22. The computermultiplies the number of Index Participation Notes 22 by the determinedvalue for the Index Participation Notes (210) and subtracts any feesassociated with redemption of the Index Participation Notes 22 (212).The Index Participation Note issuer transfers the calculated settlementvalue to the Index Participation Note holder in exchange for orotherwise extinguishing the Index Participation Notes 22 (214).

If the Index Participation Note holder has not exercised the cash-outoption and the Index Participation Notes are all variable term, theIndex Participation Note issuer uses a computer system to calculate atotal value of the Index Participation Notes 22 held by the investor(204). The computer system determines the number of the new IndexParticipation Notes that correspond to the total value of the old IndexParticipation Notes based on the issue price for Index ParticipationNotes 22 based on the issue price for (206) and the Index ParticipationNote issuer issues the new Index Participation Notes 22 to the noteholder.

The computer system also determines if a cash settlement is necessary toaccount for differences in the value of the Index Participation Notesoriginally held by the investor and the newly issued Index ParticipationNotes. If such a settlement is due, the Index Participation Note issuerprovides the cash settlement, e.g., for an odd lot amount if applicable,to the Index Participation Note holder (208).

Referring to FIG. 10, in some embodiments, an Index Participation Noteholder may be able to redeem Index Participation Notes 22 from the IndexParticipation Note issuer prior to the settlement date based on aprocess 170 for redeeming creation unit-size aggregations of IndexParticipation Notes 22 by request of an Index Participation Note holder.If the Index Participation Note issuer allows redemption of creationunit-size aggregations of Index Participation Notes 22, the IndexParticipation Note issuer determines if the Index Participation Noteholder owns a creation unit-size aggregation of Index ParticipationNotes (172).

If the Index Participation Note holder does not own a creation unit-sizeaggregation of Index Participation Notes, the Index Participation Notes22 may be traded on an exchange, market or other trading venue. When theIndex Participation Note holder owns less than a creation unit-sizeaggregation of Index Participation Notes, the Index Participation Noteholder can not redeem the Index Participation Notes 22 prior to thesettlement date of the futures contract 18.

If the Index Participation Note holder does own a creation unit-sizeaggregation of Index Participation Notes, the Index Participation Noteissuer receives a redemption request from the Index Participation holder(176). The Index Participation Note issuer uses a computer system tocalculate the current pro-rata cash value for a creation unit of IndexParticipation Notes (178). The cash value includes the total value ofthe cash 26 in the creation unit 20.

The Index Participation Note issuer may charge a fee for redemption ofthe Index Participation Notes 22 prior to the settlement date. If such afee is charged, the computer system subtracts the fee associated withthe redemption from the total cash value of the creation unit (180).Since the settlement date of the futures contract has not yet arrived,the Index Participation Note issuer transfers the futures contract 24 inthe creation unit 20 (182) and transfers the cash value less any fees(184) to the Index Participation Note holder in exchange for the IndexParticipation Notes 22.

Creation Unit Including Multiple Index Futures Contracts

While the creation unit 20 in the embodiments described above has beendescribed as including a single index futures contract 24 and a definedamount of cash 20, other arrangements are possible. For example, thecreation unit 20 could include a blend of multiple, different indexfutures contracts.

Referring to FIG. 11, in one particular example, the creation unit 20includes weighted amounts of each of the S&P 500 index futures, theNasdaq 100 index futures, and the Dow Jones Industrial Average (DJIA)futures. As shown in FIG. 11, the creation unit 20 includes one S&P 500long index futures contract 220, one Nasdaq 100 long index futurescontract 222, and one Dow Jones Industrial Average (DJIA) long indexfutures contract 224. The creation unit also includes a predeterminedamount of cash 226. Upon formation of the creation unit 20, the value ofthe cash 226 would be a sum of the initial mark price for the S&P 500long index futures contract 220, the initial mark price for Nasdaq 100long index futures contract 222, and the initial mark price for DowJones Industrial Average (DJIA) long index futures contract 224. Uponsettlement, the value of the creation unit 20 will converge to the sumof the value of the S&P 500, Nasdaq 100, and DJIA, after accounting forindex multipliers in the creation unit.

Index Participation Notes based on a blend of different index futurescould also be based on particular regions (e.g., Europe, Asia, SouthAmerica) or on particular types of indexes (e.g., index devoted tosectors, or indexes that have different weightings such ascapitalization weighted stock indexes, price weighted stock indexesequal weighted stock indexes, and so forth).

Magnified Index Participation Note

Referring to FIG. 12, an alternative embodiment of a creation unit 244includes multiple index futures contracts (e.g., long index futurescontract 240 and long index futures contract 242) based on the sameindex. The amount of cash is equal to the mark price of a single futurescontract. For example, if long index futures contracts 240 and 242 eachhave a mark price of $1500, upon generation of the creation unit 244 theamount of cash 242 would be $1500. Including multiple index futurescontracts 240 and 242 in the creation unit 244 increases the leverage ofthe Index Participation Note 246 by magnifying the position taken by thelong index futures contract embodiment described above, the resultingcreation unit is based on a single futures contract and the mark priceof the single contract and when the value of the index futures increasesby 1% the value of the Index Participation Notes 22 increases by 1%.Whereas, when the creation unit 244 includes two long index futurescontract 240 and 242 and the cash 242 in the creation unit 244 is equalto the mark price of one of the two index futures contracts, when thevalue of the index futures increases by 1% the value of the IndexParticipation Notes 246 increases by about 2% (correspondingly when thevalue falls by 1% for the futures contract the value falls by about 2%for the Index Participation Note 246). Thus, the number of long futurescontracts included in the creation unit 244 serves as a multiplier tothe gains/losses incurred by the magnified Index Participation Notes246.

The number of index futures contracts in the creation unit 244 for themagnified Index Participation Notes 246 can vary. For example, the IndexParticipation Note issuer could issue magnified Index ParticipationNotes 246 with between two and ten index futures contract included inthe creation unit 244. If the creation unit 244 includes ten long indexfutures contracts, a one percent increase in the value of the futurescontract would generate a corresponding ten percent increase in thevalue of the magnified Index Participation Notes 246.

Creation and Redemption Arbitrage

In some embodiments, issuance and subsequent trading of the IndexParticipation Notes 22 may result in the Index Participation Notes(e.g., Index Participation Notes 22) trading at a slight premium ordiscount to the futures contracts. When the Index Participation Notes 22are trading at a slight premium or discount, an arbitrageur could usethe situation to arbitrage based on the premium or discount.

If the Index Participation Notes 22 are trading at a premium to thefutures contracts 18, the arbitrageur can make money using a creationarbitrage scenario. For example, if Index Participation Notes with a2006 settlement date are trading at a premium to the index futures withthe same settlement date an arbitrage scenario exits. The arbitrageursells one creation unit worth of 2006 Index Participation Notes at thepremium price on a stock exchange and buys one futures contract at thediscount price to lock in the price differential. The arbitrageurrequests a creation of one creation unit of newly-issued 2006 IndexParticipation Notes from the Index Participation Note-issuer anddelivers out (via clearing house transfer) an open futures position pluscash to the Index Participation Note-issuer. The arbitrageur receivesone creation unit of 2006 Index Participation Notes from the IndexParticipation Note-issue to cover the sale on the stock exchange on T+3settlement and also receives more than enough proceeds from the sale ofthe Index Participation Notes on T+3 settlement to cover the cashdelivery to the Index Participation Note issuer for the creation withthe excess cash proceeds corresponding to the arbitrages profit from thecreation transaction. Thus, as shown above, if the Index ParticipationNotes are trading at a premium to the futures contracts, the arbitrageurcan make money off the difference in price.

Conversely, if the Index Participation Notes are trading at a discountto the futures contracts, the arbitrageur can make money using aredemption arbitrage scenario. For example, if Index Participation Noteswith a 2006 settlement date are trading at a discount to the indexfutures with the same settlement date, an arbitrage scenario exists. Thearbitrageur buys one creation unit of the 2006 Index Participation Notesat the discount price on the stock exchange and sells one futurescontract at the premium price to lock in differential. The arbitrageurrequests redemption of one creation unit of the 2006 Index ParticipationNotes from Index Participation Note-issuer and receives in (via aclearing house transfer) an open long futures position plus more thanenough cash from the Index Participation Note-issuer to cover thepurchase of the Index Participation Notes, with the excess cashcorresponding to the arbitrage profit from the redemption transaction.The arbitrageur delivers one creation unit of 2006 Index ParticipationNotes to the Index Participation Note-issuer to effect the in-kindredemption of the Index Participation Notes.

Creation Unit Including Short Index Futures Contracts (Bear IndexParticipation Note)

Referring to FIG. 13, while in the examples described above the creationunit (e.g., creation unit 20 or creation unit 244) included long indexfuture contract(s) in some embodiments a creation unit 234 can include ashort index futures contract 230. In order to form the creation unit234, the Index Participation Note issuer accepts a short index futurescontract plus cash from an Index Participation Note creator in exchangefor the issuance of Bear Index Participation Notes. The credit to thefutures clearing margin account on a short index futures positioncorresponds to the original futures mark price minus the spot price(e.g., the index value) at maturity of the short index futures contract.Such Index Participation Notes issued based on a creation unit 234, (ashort futures contract) are referred to herein as “bear” IndexParticipation Notes 236 because their performance will have an inverserelationship to the performance of the index. Thus, if the indexdecreases below its initial mark price the value of the bear IndexParticipation Notes 236 increases because short futures positions arecredited with cash as the futures mark goes down and if the indexincreases the value of the bear Index Participation Notes 236 decreasesbecause short futures positions are debited as the futures mark goes up.

The creation unit 234 also includes a pre-defined amount of cash 232.Since the price of the index futures contract 230 and the cash 232 areguaranteed to converge to the index value on the final settlement dateof the future contract 230, the cash value 232 including in the creationunit 234 upon generation of the bear Index Participation Notes 236 canbe calculated by a computer system to account for the inverse relationbetween the index value and the Index Participation Note value.

Balanced-Asset Futures Based Index Participation Notes

In some embodiments, investment instruments other than index basedfutures contracts can be included in a creation unit and used togenerate Index Participation Notes. For example, a creation unit couldblend futures contracts for diversified asset exposure inpre-determined, weighted amounts between stocks, bonds, currencies,and/or other assets underlying futures contracts, provided such futurescontracts are cash settled in the manner previously described.

Index Options-based Index Participation Notes

Referring to FIG. 14, an alternative embodiment of Index ParticipationNotes 314 has an Index Participation Note issuer issuing IndexParticipation Notes 314 that are backed by a call and put optionpositions on a particular index of securities. The Index ParticipationNotes 314 are tradable index shares that are backed by a fractionalinterest in a long call index option position 316, a short put indexoptions position 318, and a defined amount of cash 320 all of which areincluded in a creation unit 312.

Each creation unit 312 is divided into multiple Index ParticipationNotes 314. For example, creation unit 312 can be partitioned into 100Index Participation Notes 314, such that each Index Participation Note314 represents a 1/100th ownership interest in the index long call andshort put options positions 316 and 318 and a 1/100th ownership interestin the cash 320 included in the creation unit 312. Other partitions ofthe creation unit 312 into other amounts of Index Participation Notes 22are possible. In some embodiments, each creation unit is divided intofrom about 100 to about 10,000 Index Participation Notes 22.

Index options contracts such as the long call index option position 316and the short put index option position 318 are call/put options basedon a stock market index such as the S&P 500® or the Nasdaq 100®, whichmay be European exercised (i.e., exercised on expiration) or Americanexercised (i.e., exercisable on or before the expiration date). Incontrast to stock options, index options do not require the writer of acall option to actually deliver shares of the stocks included in theindex upon exercise of the option or the put writer to actually purchasethe shares of stock included in the index upon exercise of the option.Rather, the index options are based on a cash settlement procedure. Thepayoff that would be due if the option were exercised is calculated and,upon exercise of an option, the option writer pays the calculated amountto the holder of the option.

The long call index option position 316 included in the creation unit312 gives the holder of the position (e.g., the note issuer 310) theeconomic benefit of the amount by which the index value exceeds thestrike price on the option expiration date. Thus, if the index increasesin value above the strike price, the Index Participation Note increasesin value. On the other hand, the short, put index option position 318gives the holder of the short position the economic benefit of theamount by which the index value falls short of the strike price on theoption expiration date. Thus, if the index decreases in value, the IndexParticipation Note 310 decreases in value.

A computer system calculates the amount of cash 320 included in thecreation unit 312. In general, the amount of cash 320 equals the optionstrike price times a contract multiplier. If the cash 320 is held in aninterest bearing account, the computer system calculates the total valueof the cash 320 in the creation unit 312 on any day after creation toreflect principal value plus accrued interest.

Referring to FIG. 15, in order to facilitate creation of IndexParticipation Notes 314, long call and short put options positions 316and 318 are established by an investor seeking to generate IndexParticipation Notes and transferred with a requisite cash amount via aclearing house 330 to the Index Participation Note issuer 310 inexchange for the newly issued Index Participation Notes. The IndexParticipation Note issuer 310 receives, the long call options positions316 and the short put index options positions 318 plus cash throughaccounts at the clearing house 330. Thus, the Index Participation Noteissuer 310 will have an increase in value in the options and cashpositions if the index rises in value and will have a decrease in valueif the index decreased in value by the expiration date.

Both the long call and short put index options positions 316 and 318 areestablished based on the same “strike price” for the options contracts.On the expiration date for the options contracts, if the value of theindex is greater than the strike price, money is transferred from theclearing house 330 to the Index Participation Note issuer 310 (asindicated by arrows 336 and described below in relation to FIGS. 16-18).Conversely, on the expiration date for the options contracts, if thevalue of the index is less than the strike price, money is transferredfrom the Index Participation Note issuer 310 to the clearing house 330.

After the options positions 316, 318, 332, and 334 and cash have beendelivered via the clearing house 330 to the Index Participation Noteissuer 310, the Index Participation Note issuer 310 produces a creationunit 312. As described above, the creation unit 312 holds a long, calland a short put index options positions 316 and 318 and a predefinedamount of cash 320. The amount of cash 320 included in the creation unit312 equals the strike price for the options contracts 316 and 318multiplied by a contract multiplier (if applicable). For example, if thestrike price for the long call index option position 316 is $1000 andthe strike price for the short put index options contract 318 is $1000upon formation the creation unit would include $1000 multiplied by thecontract multiplier (if any) for the options contracts.

Initially, upon the first generation of particular Index ParticipationNotes, the Index Participation Notes are valued based on the cash amountrelated to the pro-rata cash 320 in the creation unit 312 and the marketprice of the options contracts 316 and 318 at the time of firstgeneration of the Index Participation Notes 314 after accounting forexpenses and fees. Thus, the cost of the Index Participation Note 314 isinitially based on the strike price of the options contracts 316 and 318for the index on the day of formation of the creation unit 312. Ifadditional Index Participation Notes 314 are issued to investors 322after the initial creation unit, a computer system calculates the amountof cash necessary to form a creation unit 312. The amount of cash willinclude any accrued interest such that the formation of the additionalIndex Participation Notes 314 does not dilute the value of thepreviously offered Index Participation Notes 314.

After issuance of the Index Participation Note 314 by the IndexParticipation Note issuer 310, the Index Participation Note 314 can betraded on an exchange, market, electronic communication network (ECN)and other trading venues. In order to facilitate open trading of theIndex Participation Notes 314, the Index Participation Notes 314 can belisted and traded like ordinary shares of stock or exchange traded funds(ETFs) on one or more national securities exchanges and/or through thetrading facilities of one or more electronic communication networks(ECNS).

Secondary market trading of Index Participation Notes 314 will be atprices governed by competitive supply and demand forces taking intoconsideration the values of the index options contracts, cash, and valueof the index that the Index Participation Notes 314 represent. Since theIndex Participation Notes 314 are traded in a manner similar totraditional stocks on a national securities exchange, the IndexParticipation Notes 314 will be available to be traded and held throughany ordinary stock brokerage account and handled by any one of theRegistered Representatives in the United States today.

Since the creation unit 312 includes a long call option 316, a short putoption 318, and a defined amount of cash 320 corresponding to the strikeprice of the options, the value of the Index Participation Note 314converges to the value of the underlying index on the expiration date ofthe index options contracts 316 and 318. With this arrangement theinvestment position represented by the Index Participation Note 314 iseconomically equivalent to being long on the basket of stocks includedin the index regardless of whether the index increases or decreases invalue. In order for the value of the Index Participation Notes 314 toconverge to the index on the settlement date, the strike price of thelong call option 316 and the short put option 318 must be the same.

For an index call option, the payoff to a holder of an index call optionis:

$\begin{matrix}{V - S} & {{{if}\mspace{14mu} V} > s} \\0 & {{{if}\mspace{14mu} V} = S} \\0 & {{{if}\mspace{14mu} V} < S}\end{matrix}$where V is the value of the index at expiration of the index call optionand S is the strike price for the index call option.

For a put index option, the payoff to a holder of the put index optionas:

$\begin{matrix}0 & {{{if}\mspace{14mu} V} > s} \\0 & {{{if}\mspace{14mu} V} = S} \\{S - V} & {{{if}\mspace{14mu} V} < S}\end{matrix}$where V is the value of the index at expiration of the option and S isthe strike price for the option. Since the Index Participation Noteissuer 314 is short the put option, the Index Participation Note issuer314 will be liable for payment of S-V should the value of the index beless than the strike price on settlement date. Thus, the netgains/losses credited to or debited against the cash value of thecreation unit are as follows

$\begin{matrix}{+ \left( {V - S} \right)} & {{{if}\mspace{14mu} V} > s} \\0 & {{{if}\mspace{14mu} V} = S} \\{- \left( {S - V} \right)} & {{{if}\mspace{14mu} V} < {S.}}\end{matrix}$

Since the creation unit 312 includes cash equal to the strike price ‘S’,the value of the creation unit converges to the value of the index ‘V.’That is, regardless of whether ‘V’ is greater than ‘S, ’ equal to ‘S’ orless than ‘S’ on expiration date, the value of the account holding thelong call, short put, and cash equal to the strike price equals ‘V’value of the index.

Referring to FIG. 16, a process 340 for issuing and redeeming IndexParticipation Notes based on options contracts is shown. The IndexParticipation Note issuer 310 receives a long index call option having aparticular strike price, referred to herein as strike price ‘S’ (342)and receives a short index put option having the same strike price ‘S’(344). The Index Participation Note issuer 310 also receives an amountof cash equal to the strike price ‘S’ in the creation unit 312 (346).Since the strike price ‘S’ of the long call and short put optionspositions are the same and the creation unit 312 includes cash 320 equalto the strike price ‘S’, the value of the creation unit 312 converges tothe value of the index on the date of expiration after accounting forthe index multiplier.

As the value of the creation unit converges to the index, on theexpiration date, the Index Participation Note issuer 310 uses a computersystem to administer, monitor, and reconcile cash flows depending onwhether the index price is greater than, equal to, or less than thestrike price ‘S’ (348). For example, if the index value is greater thanthe strike price on expiration date, the Index Participation Note issuerexercises the call option (350) and the put option (352) is notexercised. Conversely, if the index value is less than the strike price‘S’ on expiration date, the put option is exercises by its holder (354)against the Index Participation Note issuer 310 while the call option(356) is not exercised. The computer system adjusts the amount of cashincluded in the creation unit 312 based on the exercised options andexercised settlement values. Examples are presented below in relation toFIGS. 17A, 17B, 18A, and 18B.

FIGS. 17A and 17B depict examples of the convergence of the value of thecreation unit 312 and the index after accounting for the indexmultiplier when the strike price for the options contracts 316 and 318is the same as the value of the index on the date of generation of thecreation unit 312.

Referring to FIG. 17A, an example is depicted in which the strike price364 a is equal to the value of the index on the issue date 366. In thisexample, the value of the index (represented by line 367) rises betweenthe issue date 366 and the expiration date 368. At the expiration date368, the value of the index is greater than the strike price of theoptions contract. Thus, the call option has a payout 370 a of the indexvalue minus the strike price and the put option expires worthless (i.e.,has a value of $0). Therefore, the sum of the cash 320 in the creationunit 312 (e.g., the strike price plus the payout 370 a from the calloption) converges to the value of the index upon settlement.

Referring to FIG. 17B, the strike price 364 b is equal to the value ofthe index on the issue date 366. In this example the value of the index(represented by line 367) decreases between the issue date 366 and thesettlement date 368. At the settlement date 368, the strike price 364 bof the options contracts is greater than the value of the index 362 b.Thus, the call option expires worthless (i.e., has a value of $0), andsince the Index Participation Note issuer 310 holds a short put option318, the Index Participation Note issuer 310 pays the buyer of theoption a payout 370 b equal to the strike price minus the index value.The sum of the cash 320 in the creation unit 312 (e.g., the strike priceminus the payout 370 b paid from the put option) converges to the valueof the index on the settlement date 368.

FIGS. 18A and 18B depict examples of the convergence of the value of thecreation unit 312 and the index when the strike price for the optionscontracts 316 and 318 is different from the value of the index on thedate of generation of the creation unit 312 are shown.

Referring to FIG. 18A, in this example the strike price 384 a isdifferent from the value of the index 386 a on the issue date 366. Inthis example the value of the index (represented by line 367) risesbetween the issue date 366 and the settlement date 368. At thesettlement date 368, the strike price 384 a of the options contracts isless than the value of the index 382 a. Thus, the put option expiresworthless and has a value of $0 (and thus the Index Participation Noteissuer 310 as the seller of the put option does not owe any money to thebuyer) and the call option has a payout 388 a of the index value minusthe strike price. Thus, the sum of the cash 320 in the creation unit 312(e.g., the strike price plus the profit 388 a from the call option) isthe value of the index 382 a.

Referring to FIG. 18B, in this example the strike price 384 b isdifferent from the value of the index 386 b on the issue date 366. Inthis example the value of the index (represented by line 367) decreasesbetween the issue date 366 and the settlement date 368. At thesettlement date 368, the strike price of the options contracts isgreater than the value of the index 382 b. Thus, the call option expiresworthless and has a payout of $0. Since the Index Participation Noteissuer 310 is short the put option, the Index Participation Note issuerpays the buyer of the option a payout 388 b equal to the strike price384 b minus the index value 382 b. Thus, again, the sum of the cash 320in the creation unit (e.g., the strike price minus the payout 388 b paidfrom the put option) converges to the value of the index 382 b on thesettlement date 368.

As shown in the examples above, in order for the value of the options316 and 318 and the cash 320 included in creation unit 312 to convergeto the value of the index on the expiration date the options have thesame strike price and the amount of cash 320 included in the creationunit 312 is equal to that strike price. However, at any given time thereare multiple options available on the market with the same expirationdate but different strike prices.

Referring to FIG. 19, a process 390 for obtaining long call index optioncontracts 316 and short put index options contracts 318 having the samestrike price and settlement date is shown. The Index Participation Noteissuer 310 uses a computer to obtain a list of available strike pricesfor call index options 316 having a particular settlement date (392) andto obtain a list of available strike prices for put index options 318having the same settlement date (394). The computer system determines ifany of the strike prices for a long call option contract and a short putoption contract are the same (396). If at least some matching strikeprices are located, the computer system instructs the IndexParticipation Note issuer 310 to accept one or more of the matchingpairs of long call and short put index options having the same strikeprice and the same expiration date in the creation unit in exchange fornewly issued Index Participation Notes (398).

Referring to FIG. 20, an exemplary listing of strike prices for longcall and short put index options is shown. The long call options (shownin column 400) include long call index options having strike prices of$800, $880, $1000, $1020, $1060, and $1200. The short put index options(shown in column 402) include short put index options having strikeprices of $750, $800, $1000, $1020, $1150, and $1200. In order todetermine the matching pairs of index options, the computer systemobtains both of these lists. After analyzing the strike prices, thecomputer system would determine that matching pairs exist at the strikeprices of $800, $1000, $1020, and $1200 (as indicated by arrows 404,406, 408, and 410, respectively). The Index Participation Note issuer310 receives one or more long call and short put index options pairshaving the same strike price and expiration date to provide a creationunit basis for issuance of Index Participation Notes 314.

Referring to FIG. 21, a process 420 for obtaining long call index optioncontracts and short put index options contracts having strike pricesequal to the index value at the issue date and having the samesettlement date is shown. The Index Participation Note issuer 310 uses acomputer system to obtain a list of available strike prices for longcall index options having a particular expiration date (422) and toobtain a list of available strike prices for short put index optionshaving the same expiration date (424). The computer options having thesame expiration date (424). The computer system determines if any of thestrike prices for the long call and short put options contracts are thesame as (or within a certain percentage of) the current value of theindex (426). If one or more matching pairs of long call and short putoptions having a strike price equal to (or about the same as) the indexvalue are located, the computer system instructs the Index ParticipationNote issuer 310 to accept at least one of the matching pair(s) of longcall and short put index options (432). If such matching pairs are notlocated, the Index Participation Note issuer 310 announces that it willaccept delivery of long call and short put options at a strike priceequal to the current index value (428). The index note issuer 310purchases one or more matching pairs of the long call and short putoptions (430).

Referring to FIG. 22, an exemplary listing of strike prices for longcall and short put index options is shown. The long call options (shownin column 434) include long call index options having strike prices of$800, $880, $1000, $1020, $1060and $1200. The short put index options(shown in column 436) include short put index options having strikeprices of $750, $800, $1000, $1020, $1150, and $1200. If the currentindex value was $1000, the computer system analyzes the lists 434 and436 and determines that a matching pair of long call and short put indexoptions exist at a strike price equal to the value of the index, namelya strike price of $1000 (as indicated by arrow 438). The IndexParticipation Note issuer 310 purchases the long call and short putindex options having the same strike price.

While in the examples described above the long call and short putoptions included in the creation unit 310 had the same strike price, insome embodiments the long call and short put options included in thecreation unit 310 can have different strike prices. In such embodiments,the value of the Index Participation Notes issued based on the creationunit does not necessarily converge to the value of the index onsettlement date. In order to guarantee the index value to the holders ofthe Index Participation Notes, the Index Participation Note issuer 310uses a computer system to calculate a valuation to determine what amountof cash to include in the creation unit after accounting the differencein value due to differences in strike prices. In order to calculate thevaluation, the computer system would determine the amount by which thevalue of the creation unit would exceed or fall short of the value ofthe index on expiration date. The computer system would also adjust thecash amount corresponding to strike price and index multiplier to offsetthe excess value or the shortfall in value in order to ensure the IndexParticipation Note converges in value with the Index.

While in the examples described above the long call and short putoptions included in the creation unit 310 had the same expiration date,in some embodiments the long call and short put options included in thecreation unit 310 can have different expiration dates. In suchembodiments, the value of the Index Participation Notes issued based onthe creation unit does not necessarily converge to the value of theindex on settlement date. In order to guarantee the index value to theholders of the Index Participation Notes, the Index Participation Noteissuer 310 uses a computer system to calculate a valuation to determinewhat amount of cash to include in the creation unit after accounting thedifference in value due to differences in expiration dates. In order tocalculate the valuation, the computer system would determine the amountby which the value of the creation unit would exceed or fall short ofthe value of the index on expiration date. The computer system wouldalso adjust the cash amount corresponding to strike price and indexmultiplier to offset the excess value or the shortfall in value in orderto ensure the Index Participation Note converges in value with theIndex.

Redemption/Settlement of IP Notes

Similar to the situation described above in relation to the IndexParticipation Notes 22 issued based on a creation unit 20 that includesan index futures contract 24 and a defined amount of cash 20, IndexParticipation Notes 314 based on long call/short put index options 316and 318 and cash 320 can have either a fixed term or a variable term.

For Index Participation Notes 314 having a fixed term, the termcoincides with the specific monthly or quarterly settlement date of thecorresponding index options contracts that are used in the creation unit312. On the settlement date the Index Participation Notes 314 areliquidated and a pro-rate share of cash is distributed to holders of theIndex Participation Notes 314.

For Index Participation Notes 314 having a variable term, holders mayexercise a cash-out, e.g., on a quarterly basis. If the holder of theIndex Participation Notes 314 elects not to cash-out the IndexParticipation Notes, the Index Participation Notes 314 are automaticallyrolled forward into new Index Participation Notes. The new IndexParticipation Notes are issued through rule-drive market execution bythe Index Participation Note-issuer 310. The notes approximatelycorrespond in underlying notional value to the remaining aggregate cashfrom the liquidated Index Participation Notes held by IndexParticipation Note-issuer.

In some embodiments, an Index Participation Note holder may redeem IndexParticipation Notes 314 from the Index Participation Note issuer 310prior to the settlement date.

If the Index Participation Note holder does not own a creation unit-sizeaggregation of Index Participation Notes, redemption is not feasible. Insuch a situation, the Index Participation Note holder can trade, i.e.,sell, the Index Participation Notes 314 on an exchange, market or othertrading venue obtain a current value for the Index Participating Notes314 prior to the settlement date.

On the other hand, if the Index Participation Note holder owns acreation unit-size aggregation of Index Participation Notes and requeststo redeem the Index Participation Notes 314 prior to settlement of theoptions contracts, the Index Participation Note issuer 310 uses acomputer to calculate the cash value for the creation unit of IndexParticipation Notes 314. Since the settlement date of the long call andshort put options contracts 316 and 318 has not yet arrived, the IndexParticipation Note issuer 310 transfers the long call and short putoptions contracts 316 and 318 in the creation unit 312 and the requisitecash value 320 after accounting for any fees to the Index ParticipationNote holder in exchange for the Index Participation Notes 314.

Creation Unit Including Multiple Long Call and Short Put Index Options

While the creation unit 312 in the embodiments described above has beendescribed as including a long call index option and a short put indexoption based on a single index, other arrangements are possible. Forexample, the creation unit 312 could include a blend of optionscontracts for multiple different indexes.

In one particular example, as shown in FIG. 23, the creation unit 312could include weighted amounts of each of the S&p 500 index, the Nasdaq100 index, and the Dow Jones Industrial Average (DJIA). The creationunit 312 includes an S&P 500 long call index option 440, and S&P 500short put index option 442, a Nasdaq 100 long call index option 444, aNasdaq 100 short put index option 446, a Dow Jones Industrial Average(DJIA) long call index option 448, and a DJIA short put index option450. The creation unit 312 also includes a defined amount of cash 452.Upon formation of the creation unit 312, the value of the cash 452 wouldbe a sum of the strike prices for the S&P 500 options, the Nasdaq 100options, and the DJIA options after applying the respective indexmultipliers.

Index Participation Notes based on a blend of different index optionscould also be based on particular regions (e.g., Europe, Asia, SouthAmerica) or on particular types of indexes (e.g., indexes devoted tosectors, or indexes that have different weightings such ascapitalization weighted stock indexes, price weighted stock indexesequal weighted stock indexes, and so forth).

Creation Unit Including Multiple Index Options Contracts (Magnified IPNote)

Referring to FIG. 24, in some embodiments, a creation unit 450 caninclude multiple long, call and multiple short, put index optionscontracts based on the same index and the same strike price andexpiration month. In the example shown in FIG. 24, the creation unit 470includes two long call index options contracts 460 and 462 and the twoshort put index options contracts 464 and 466. The creation unit 470also includes a defined amount of cash 468 equal to the strike price ofone of the options contracts multiplied by the contract multiplier.

For example, if the options contracts 460, 362, 464, and 466 each have astrike price of $1500, $1500 multiplied by the index multiplier would beincluded as the cash 468 in the creation unit 470. These multiple indexoptions contracts 460, 462, 464, and 466 increase the leverage of theIndex Participation Note by magnifying the position taken by the optionscontracts.

When the creation unit 470 includes two long call index optionscontracts 460 and 462 (in contrast to one as described above) and thecash 468 in the creation unit 470 is the strike price of a single one ofthe contracts, for each 1% by which the value of the index increasesabove the strike price by expiration date, the value of the IndexParticipation Notes 246 increases by about 2%. Similarly, when thecreation unit includes two short put index options contracts 464 and 466(in contrast to one as described above) and the cash 468 in the creationunit 470 is the strike price of a single one of the contracts, for each1% by which the value of the index decreases below the strike price byexpiration date, the value of the magnified Index Participation Notes472 decreases by about 2%. Thus, the number of long call and short putindex options contracts included in the creation unit 470 serves as amultiplier to the gains/losses incurred by the magnified IndexParticipation Note 472.

The number of index options contrasts in the creation unit 470 for themagnified Index Participation Notes 472 can vary. For example, the IndexParticipation Note issuer 310 could issue magnified Index ParticipationNotes 472 with between two and twenty long call and short put indexoptions contracts included in the creation unit 470. By way ofillustration, if the creation unit 470 includes ten long call and shortput options contracts, a one percent increase in the value of the indexabove strike price on expiration date would generate a corresponding tenpercent increase (approximately) in the value of the creation unit 470above the strike price on which the magnified Index Participation Notes472 are based on expiration date.

While in the above example, the magnified Index Participation Noteprovides a multiply enlarged return based on a change in the value ofthe index, in some embodiments a magnified Index Participation Noteprovides a multiply enlarged return if the opposite of the movement ofthe value of the index. For example, for each 1% by which the value ofthe index decreases below the strike price by expiration date, the valueof the Index Participation Notes increases by about 2%. Similarly, insome embodiments, for each 1% by which the value of the index decreasesbelow the strike price by expiration date, the value of the magnifiedIndex Participation Notes increases by about 2%. Thus, the number ofshort call and long put index options contracts included in the creationunit serves as a multiplier to the gains/losses incurred by themagnified Index Participation Note.

The number of index options contracts in the creation unit for themagnified bear Index Participation Notes can vary. For example, theIndex Participation Note issuer 310 could issue magnified bear IndexParticipation Notes 472 with between two and twenty long put and shortcall index options contracts included in the creation unit 470.

Creation and Redemption Arbitrage

In some embodiments, issuance and subsequent trading of the IndexParticipation Notes 314 may result in the Index Participation Notestrading at a slight premium or discount to the options contracts. Whenthe Index Participation Notes are trading at a slight premium ordiscount, an arbitrageur could use the situation to arbitrage based onthe premium or discount.

If the Index Participation Notes are trading at above the valuecorresponding to the current 2006 Index call options premium minus thecurrent 2006 Index put options premium plus the cash amount equal to theoptions contract strike price times the contract multiplier, anopportunity for creation unit arbitrage exists. In this situation, thearbitrageur would sell one creation unit worth of 2006 IndexParticipation Notes at the premium price on the exchange, market orother trading venue and buy one 2006 index call option contract, andsell one 2006 index put option contract to lock in the differential inthe values of the Index Participation Notes and the value of thecreation unit composed of the long 2006 Index call options and short2006 Index put options.

The arbitrageur would request the creation of one creation unit ofnewly-issued 2006 Index Participation Notes from the Index ParticipationNote-Issuer. The arbitrageur would deliver out (via clearing housetransfer) open index options positions plus cash equal to strike priceplus accrued interest to the Index Participation Note-Issuer on anappropriate settlement timeline and receive one creation unit of 2006Index Participation Notes from Index Participation Note-Issuer to coverthe sale on the exchange, market, etc on settlement. The arbitrageuralso receives more than enough cash proceeds from the sale of IndexParticipation Notes to meet its cash delivery requirements, with theexcess proceeds representing arbitrage profit from the creationtransaction.

Conversely, if the Index Participation Notes are trading below the valueequal to the current 2006 Index call options premium minus the currentIndex put options premium plus the cash amount equal to the optionscontract strike price times a contract multiplier, an opportunity forredemption arbitrage exists. In this situation the arbitrageur buys acreation unit aggregation of Index Participation Notes at the discountprice on the exchange or market or other trading venue, sells one indexcall option contract, and buys one index put option contract to lock inthe differential in the value between the current creation unit composedof the 2006 Index call options minus the current 2006 Index put optionsand the value of the Index Participation Notes.

The arbitrageur requests redemption of the creation unit aggregation ofjust-purchased Index Participation Notes from Index ParticipationNote-Issuer. The arbitrageur delivers out (via clearing house transfer)a creation unit of Index Participation Notes to the Index ParticipationNote-Issuer and as redemption proceeds receives one long call indexoption plus 1 short put index option position plus cash corresponding tothe strike price (after applying the index multiplier) plus accruedinterest from the Index Participation Note-Issuer to cover settlement ofthe options trades and Index Participation Note on appropriatesettlement timeline and with net excess cash representing arbitrageprofit from the redemption transaction.

Creation Unit Including Long Put Index Options and Short Call IndexOptions Contracts (Bear IP Note)

Referring to FIG. 25, while in some of the examples described above thecreation unit (e.g., creation unit 312) included long call/short putindex options contracts, in some embodiments, e.g., a “bear” embodimenta creation unit 486 can include a short call index option 482 and a longput index option 480 having the same strike price and expiration date.The performance of these so called “bear” Index Participation Notes 488based on creation unit 486 will have an inverse relationship to theperformance of the index. Thus, if the index decreases, the value of thebear Index Participation Notes 488 will increase, and if the indexincreases the value of the bear Index Participation Notes 488 willdecrease.

The creation unit 486 also includes a defined amount of cash 484. As thevalue of the creation unit converges to the index, on the expirationdate, the Index Participation Note issuer 310 uses a computer system toadminister, monitor, and reconcile cash flows depending on whether theindex price is greater than, equal to, or less than the strike price.For example, if the index value is greater than the strike price onexpiration date, the Index Participation Note issuer exercises the putoption and the call option is not exercised. Conversely, if the indexvalue is greater than the strike price on expiration date, the calloption is exercised by its holder while the put option is not exercised.The computer system adjusts the amount of cash included in the creationunit based on the exercised options and exercised settlement values.

Balanced-Asset Options Based IP Notes

In some embodiments, investment instruments other than index basedoptions contracts can be included in a creation unit and used togenerate Index Participation Notes. For example, a creation unit couldblend options contracts for diversified asset exposure inpre-determined, weighted amounts between stocks, bonds, currencies,commodities and/or other assets underlying options contracts. Ingeneral, the creation unit could include any cash-settled optionscontract, whether involving financial options contracts or non-financialoptions contracts, and whether index-based or not.

Upside Participation/Downside Protection Index Participation Notes

Referring to FIG. 26, in some embodiments the Index Participation Notesare upside participation/downside protection Index Participation Notes498 that provide gains in the index should the value of the indexincrease and provide protection of the initial investment should thevalue of the index decrease. Such upside participation/downsideprotection Index Participation Notes 498 are based on a creation unit496 that could include a long put based option position 490 or longindex futures option position to provide protection when the underlyingindex falls in value and a long index futures contract 492 to providegains when the underlying index rises in value. The long put indexoption (or futures option) 490 will have a strike price corresponding tothe value of the underlying stocks index below which the investor wishesto be protected against adverse price movements. The creation unit 496also includes a defined amount of cash 494 corresponding to the markprice (and accrued interest) for the index futures contracts.

Referring to FIGS. 27A and 27B, examples of the value of the creationunit 496 versus the performance of the index (indicated by line 505),for upside participation/downside protection Index Participation Notes496 based on a creation unit 496 that includes a long put index option490 (or long put index futures option) and a long index futures contract492 is shown. In this example, the strike price 502 a for the long putindex option 490 is the same as the mark price 502 a for the long indexfuture contract 492 on the date of generation of the creation unit 496.

In the example shown in FIG. 27A, the value of the index (represented byline 505) rises between the issue date 504 and the settlement date 506.At the settlement date 506, the strike price of the options contracts502 a is less than the value of the index 500 a. Thus, the put optionexpires worthless (i.e. has a profit of $0). However, since the markprice for the long index futures 502 a is less than the value of theindex 500 a, a profit 508 is gained from the long index futures contract492. Thus, the sum of the cash 494 in the creation unit 496 (e.g., thestrike price plus the profit 508 from the futures contract) is equal tothe value of the index 500 a.

In the example shown in FIG. 27B, the value of the index (represented byline 505) falls between the issue date 504 and the settlement date 506.At the settlement date 506, the strike price 500 b of the optionscontract is greater than the value of the index 502 b. As such, the longput option 490 has a payout 510 of the strike price minus the indexvalue. The futures contract has a loss equal to the strike price minusthe index value. Thus, the sum of the profit from the long put option490 and the loss from the long futures 492 is approximately zero and thevalue of the Index Participation Note on settlement date is equal to thestrike price. As such, the upside participation/downside protectionIndex Participation Note 498 is shown to protect the investment of thenote holder from the decrease in the value of the index below the strikeprice.

Upside Participation/Downside Protection Index Participation Notes

Referring to FIG. 28, in some embodiments, Index Participation Notes 546are based on a creation unit 544 that includes a long call index optionscontract 540 to provide the upside gains. The creation unit 544 alsoincludes a defined amount of cash 542 equal to the strike price for thelong call index options contract.

Referring to FIG. 29A and 29B, examples of the value of the creationunit 544 versus the performance of the index (indicated by line 552),for upside participation Index Participation Notes 546 based on acreation unit 544 that includes a long call index option 540 (or futuresoption) and cash 542 is shown.

In the example shown in FIG. 29A, the value of the index (represented byline 552) rises between the issue date 554 and the settlement date 556.At the settlement date 556, the strike price of the options contracts550 a is less than the value of the index 548 a. Thus, the long callindex option or futures option has a payout of the difference betweenthe index 548 a and the strike price 550 a (represented by arrow 558).

In the example shown in FIG. 29B, the value of the index (represented byline 552) falls between the issue date 554 and the option expirationdate 556. At the expiration date 556, the strike price 550 b of the longcall options contract is greater than the value of the index 502 b. Assuch, the long call index option expires worthless. Thus, at thesettlement date 556, the Index Participation Note has a value equal tothe pro-rata share of the cash 542 included in creation unit 544 whichcorresponds to the strike price. The value of the Index ParticipationNote is not further reduced by the decrease in the value of the index,thereby providing downside protection.

Buy/Write Index Participation Note

Referring to FIG. 30, in some embodiments the Index Participation Notesare buy/write Index Participation Notes 570 that provide an economiccash benefit when the underlying index increases in value but not abovethe strike price from the issue date to the settlement date (e.g., whenthe market is ‘flat’). Such buy/write Index Participation Notes 570 arebased on a creation unit 568 that includes a long index futures contract562 and an amount of cash 566 equal to the mark price for the long indexfutures contract 562. The combination of the long index futures contract562 and the cash 566 provides for a return corresponding to the indexreturn (as described above). The creation unit also includes a shortcall index options contract 564 or short call index futures option withsame strike price. When the Index Participation Note issuer writes theshort call index options contract 564, the note issuer receives theoptions premium or proceeds from the sale to the party that purchasesthe long position. Thus, an economic cash benefit is made from writingthe short call index options contract 564.

Buy/write Index Participation Notes 570 provide an economic cash benefitif the index increases in value up to but not above the strike price ofthe options or futures options. If the index increases in value abovethe strike price, the gains from the long index futures contract 562 andthe loss from the short call options contract 564 offset each other suchthat there are no gains or losses for increases in index value above thestrike price. If the index decreases in value, the value of thebuy/write Index Participation Notes 570 tracks the index value.

While in the example of a buy/write Index Participation Notes 570described above, the creation unit included a long index futurescontract 562 and a defined amount of cash 566, other positionsequivalent in value to a long stock position could be substituted forthe long index futures contract 562 and defined amount of cash 566. Forexample, the creation unit could include a long call index optionscontract, a short put index options contract with a strike pricedifferent from the strike price of the short index call option or shortindex call futures option, and an amount of cash equal to the strikeprice of the options contracts.

Distributions

As described above, the cash included in a creation unit (e.g., cash 26in creation unit 20, cash 320 in creation unit 312) for the IndexParticipation Notes is invested in interest bearing investments. Forexample, the cash can be held in U.S. Treasury bills or notes thatguarantee a fixed return over a predefined period of time. The netprofit of interest gained on the cash is periodically distributed to theholders of the index participation, e.g., quarterly, semi-annually, orannually. In some embodiments, the yield on cash held in U.S. Treasurybills in Issuer's Custody Account can accrue and is distributed to IndexParticipation Note holders on final redemption, expiration, orsettlement of the Index Participation Note in lieu of quarterly stockdividends.

The system and methods described herein can be implemented in digitalelectronic circuitry, or in computer hardware, firmware, software, or incombinations thereof. For example, calculations of the cash value for acreation unit, the formation of a creation unit, the settlementprocesses for Index Participation Notes, etc. can occur in systems 511as shown in FIG. 31. Generation of creation units can be implementedusing any technique. Also, data structures used to represent contents ofthe creation units and interest participation notes can be stored inmemory and in persistence storage. The Index Participation Notes can berepresented by certificates or preferably as book entries in the recordsof an administrator or broker/dealer or clearing house or transfer agentor registrar either as manual entries or preferably as data structuresin an administrator or a broker/dealer's computer systems.

Apparatus of the invention can be implemented in a computer programproduct tangibly embodied in a machine-readable storage device forexecution by a programmable processor and method actions can beperformed by a programmable processor executing a program ofinstructions to perform functions of the invention by operating on inputdata and generating output. The invention can be implementedadvantageously in one or more computer programs that are executable on aprogrammable system including at least one programmable processorcoupled to receive data and instructions from, and to transmit data andinstruction to, a data storage system, at least one input device, and atleast one output device. Each computer program can be implemented in ahigh-level procedural or object oriented programming language, or inassembly or machine language if desired, and in any case, the languagecan be a compiled or interpreted language. Suitable processors include,by way of example, both general and special purpose microprocessors.Generally, a processor will receive instructions and data from aread-only memory and/or a random access memory. Generally, a computerwill include one or more mass storage devices for storing data files,such devices include magnetic disks, such as internal hard disks andremovable disks magneto-optical disks and optical disks. Storage devicessuitable for tangibly embodying computer program instructions and datainclude all forms of non-volatile memory, including, by way of example,semiconductor memory devices, such as EPROM, EEPROM, and flash memorydevices; magnetic disks such as, internal hard disks and removabledisks; magneto-optical disks; and CD_ROM disks. Any of the foregoing canbe supplemented by, or incorporated in, ASICs (application-specificintegrated circuits).

An example of one such type of computer is shown in FIG. 31, which showsa block diagram of a programmable processing system (system) 511suitable for implementing or performing the apparatus or methodsdescribed herein. The system 511 includes a processor 520, a randomaccess memory (RAM) 521, a program memory 522 (for example, a writeableread-only memory (ROM) such as a flash ROM), a hard drive controller523, and an input/output (I/O) controller 524 coupled by a processor(CPU) bus 525. The system 511 can be preprogrammed, in ROM, for example,or it can be programmed (and reprogrammed) by loading a program fromanother source (for example, from a floppy disk, a CD-ROM, or anothercomputer).

The hard drive controller 523 is coupled to a hard disk 130 suitable forstoring executable computer programs, including programs embodying thepresent invention, and data including storage. The I/O controller 524 iscoupled by an I/O bus 526 to an I/O interface 527. The I/O interface 527receives and transmits data in analog or digital form over communicationlinks such as a serial link, local area network, wireless link, andparallel link.

While embodiments have been described above in which a creation unitincludes a long put index option position, in some embodiments, a longindex futures option position can be substituted for the long put indexoption position in a creation unit.

While embodiments have been described above in which a creation unitincludes a short put index option position, in some embodiments, a shortput index futures option position can be substituted for the short putindex option position in a creation unit.

While embodiments have been described above in which a creation unitincludes a long call index option position, in some embodiments, a longcall index futures option position can be substituted for the long callindex option position in a creation unit.

While embodiments have been described above in which a creation unitincludes a short call index option position, in some embodiments, ashort call index futures option position can be substituted for theshort call index option position in a creation unit.

Particular embodiments have been described; however, other embodimentsare within the scope of the following claims.

1. A computer implemented method, comprising: determining, by one ormore computers, a value for a tradable index share that inversely tracksperformance of an index, the tradable index share backed by both afractional interest in: a derivative financial instrument; and an amountof cash, the amount of cash at the time of formation of the tradableindex share being based on an initial strike price of the derivativefinancial instrument; with determining the value for the tradable indexshare comprising: accessing by the one or more computers a value of thederivative financial instrument at or near the time of thedetermination; accessing by the one or more computers a value of thecash at or near the time of the determination; and calculating by theone or more computers the value for the tradable index share based onthe value of the derivative financial instrument and the value of thecash.
 2. The computer implemented method of claim 1, wherein thederivative financial instrument comprises a short index futurescontract.
 3. The computer implemented method of claim 2, furthercomprising: producing by the one or more computers a representation of acreation unit that includes fields that identify the short index futurescontract and the amount of cash, the tradable index shares representinga fractional interest in the creation unit.
 4. The computer implementedmethod of claim 3, wherein producing the representation of the creationunit comprises: accessing an initial mark price of the short indexfutures contract and a contract multiplier of the futures contract; andrecording a defined amount of cash related to the initial mark price toadd to the creation unit.
 5. The computer implemented method of claim 4,further comprising calculating the defined amount of cash on a datesubsequent to generation of the tradable index shares by multiplying themarket price of the short index futures contract on a particular date bythe contract multiplier.
 6. The computer implemented method of claim 1,wherein the derivative financial instrument comprises: a long put indexoption; and a short call index option, wherein the long put indexoptions contract and the short call index options contracts have thesame initial strike price and the same expiration date.
 7. The computerimplemented method of claim 6, further comprising: producing in the oneor more computers a representation of a creation unit that includesfields that identify the long put index options contract, the short callindex options contract, and the amount of cash, the tradable indexshares representing a fractional interest in the creation unit.
 8. Thecomputer implemented method of claim 7, wherein producing therepresentation of the creation unit comprises: recording an initial markprice of the long put index and short call index options contracts and acontract multiplier of the futures contract; and recording a definedamount of cash to add to the creation unit.
 9. The computer implementedmethod of claim 8, further comprising calculating the defined amount ofcash on a date subsequent to generation of the tradable index shares by:determining if the index value on the expiration date is greater thanthe strike price of the long call and short put options contracts; ifthe index value on the expiration date is greater than the strike priceof the long call and short put options contracts, exercising the longcall index options contract; and if the index value on the expirationdate is less than the strike price of the long call and short putoptions contracts, exercising the short put index options contract. 10.The computer implemented method of claim 9, wherein calculating thedefined amount of cash further comprises adding accrued interest. 11.The computer implemented method of claim 1, wherein the index comprisesa securities index.
 12. A computer implemented method, comprising:determining by one or more computers, a value for a tradable index sharethat provides a positive return if performance of an index is within apredefined range of performance of the index, the tradable index sharebacked by a fractional interest in: a derivative financial instrument, ashort call options contract, and an amount of cash, the amount of cashat the time of formation of the tradable index share being based on theinitial strike price of the derivative financial instrument; withdetermining the value of the tradable index share comprising: accessingby the one or more computers a value of the derivative financialinstrument at or near the time of the determination; accessing by theone or more computers a value of the short call options contract at ornear the time of the determination and; a value of the cash at or nearthe time of the determination; and calculating by the one or morecomputers the value for the tradable index share based on the value ofthe derivative financial instrument, the value of the short call optionscontract, and the value of the cash.
 13. The computer implemented methodof claim 12, wherein the derivative financial instrument comprises along index futures contract.
 14. The computer implemented method ofclaim 13, further comprising calculating the amount of cash on a datesubsequent to generation of the tradable index shares by: multiplying acurrent mark price for the long index futures contract on the date ofreceipt of the redemption request by the contract multiplier.
 15. Themethod of claim 14, wherein determining the amount of cash furthercomprises adding accrued interest.
 16. The computer implemented methodof claim 13, wherein the amount of cash is equal to the mark price ofthe long index futures contract, the method further comprising:producing by one or more computers a representation of a creation unitthat includes fields that identify the long index futures contract andthe amount of cash, the tradable index shares representing a fractionalinterest in the creation unit.
 17. The computer implemented method ofclaim 12, wherein the derivative financial instrument comprises: a longcall index options contract; and a short put index options contract, thelong call index options contract and the short put index optionscontract having the same initial strike price and the same expirationdate.
 18. The computer implemented method of claim 17, wherein theamount of cash comprises an amount of cash equal to the initial strikeprice.
 19. The computer implemented method of claim 18, furthercomprising: producing by the one or more computers a representation of acreation unit that includes fields that identify the long call indexoptions contract, the short put index options contract, the short callindex options contract, and the amount of cash, the tradable indexshares representing a fractional interest in the creation unit.
 20. Thecomputer implemented method of claim 19, further comprising calculatingthe defined amount of cash on a date subsequent to generation of thetradable index shares by: multiplying the initial strike price of one ofthe long call and short put index options contracts by the contractmultiplier.
 21. The method of claim 20, wherein determining the amountof cash further comprises adding accrued interest.
 22. The computerimplemented method of claim 12, wherein the index comprises a securitiesindex.
 23. A computer program product stored on a computer-readablemedium comprising instructions for causing a computer system to: storeinformation associated with a tradable index share that inversely tracksperformance of an index, the tradable index share backed by both afractional interest in: a derivative financial instrument; and an amountof cash, the amount of cash at the time of formation of the tradableindex share being based on the initial strike price of the derivativefinancial instrument; access a value of the derivative financialinstrument and a value of the cash; and calculate a value for thetradable index share based on the value of the derivative financialinstrument and the value of the cash.
 24. The computer program productof claim 23, wherein the derivative financial instrument comprises ashort index futures contract.
 25. The computer program product of claim24, further comprising instructions for causing a computer system to:produce a representation of a creation unit that includes fields thatidentify the short index futures contract and the amount of cash, thetradable index shares representing a fractional interest in the creationunit.
 26. The computer program product of claim 23, wherein thederivative financial instrument comprises: a long put index option; anda short call index option, wherein the long put index options contractand the short call index options contracts have the same initial strikeprice and the same expiration date.
 27. The computer program product ofclaim 26, further comprising instructions for causing a computer systemto: produce in the computer system a representation of a creation unitthat includes fields that identify the long put index options contract,the short call index options contract, and the amount of cash, thetradable index shares representing a fractional interest in the creationunit.
 28. A system comprising: one or more computer systems controlledor managed by the same or different entities for calculating a value ofa tradable index share that tracks performance of an index and is backedby a fractional interest in a creation unit, the one or more computersystems comprising: a memory; and a processor, the processor beingconfigured to: store information associated with a tradable index sharethat inversely tracks performance of an index, the tradable index sharebacked by both a fractional interest in: a derivative financialinstrument; and an amount of cash, the amount of cash at the time offormation of the tradable index share being to based on the initialstrike price of the derivative financial instrument; access a value ofthe derivative financial instrument and a value of the cash; andcalculate a value for the tradable index share based on the value of thederivative financial instrument and the value of the cash.
 29. Thesystem of claim 28, wherein the derivative financial instrumentcomprises a short index futures contract.
 30. The system of claim 29,wherein the processor is further configured to: produce a representationof a creation unit that includes fields that identify the short indexfutures contract and the amount of cash.
 31. The system of claim 28,wherein the financial instrument comprises: a long put index option; anda short call index option, wherein the long put index options contractand the short call index options contracts have the same initial strikeprice and the same expiration date.
 32. The system of claim 31, whereinthe processor is further configured to: produce by the computer system arepresentation of a creation unit that includes fields that identify thelong put index options contract, the short call index options contract,and the amount of cash, the tradable index shares representing afractional interest in the creation unit.
 33. A computer implementedmethod, the method comprising: producing by a computer a creation unitfor inversely tracking performance of an index of securities by:recording accepting delivery of a derivative financial instrument on theindex and cash corresponding to the mark price of the derivativefinancial instrument; generating a plurality of Index Participation Noteshares each of the Index Participation Note share representing afractional interest in the creation unit; modifying the initial valuefor the amount of cash that secures the tradable index share based onperformance of the derivative financial instrument; at a time subsequentto the generation of the plurality of Index Participation Note shares,accessing by the computer a value of the derivative financial instrumentand a value of the cash; and calculating by the computer a value for atradable index share based on the values of the derivative financialinstrument and the value of the cash.
 34. The computer implementedmethod of claim 33, wherein the derivative financial instrumentcomprises a short index futures contract.
 35. The computer implementedmethod of claim 33, wherein the derivative financial instrumentcomprises: a long put index option; and a short call index option,wherein the long put index options contract and the short call indexoptions contracts have the same initial strike price and the sameexpiration date.
 36. The computer implemented method of claim 1, whereinthe amount of cash at the time of formation of the tradable index shareis equal to the initial strike price of the derivative financialinstrument.
 37. The computer implemented method of claim 12, wherein theamount of cash at the time of formation of the tradable index share isequal to the initial strike price of the derivative financialinstrument.
 38. The computer program product of claim 23, wherein theamount of cash at the time of formation of the tradable index share isequal to the initial strike price of the derivative financialinstrument.
 39. The computer program product of claim 28, wherein theamount of cash at the time of formation of the tradable index share isequal to the initial strike price of the derivative financialinstrument.